Budgeted, Applied, and Actual Manufacturing Overhead

Manufacturing overhead has three amounts that serve different purposes. Confusing them changes job costs even when the arithmetic looks plausible.

Set the budget-based rate first

Divide estimated manufacturing overhead by estimated activity in the chosen allocation base. Keep the base consistent: a machine-hour rate must be multiplied by machine hours, not labor dollars.

Apply the rate to actual activity

Consider an independent example: a factory budgets 96,000 dollars of overhead and 12,000 machine hours. Its predetermined rate is 8 dollars per machine hour. A job using 35 machine hours receives 280 dollars of applied overhead.

That allocation is a job-cost assignment, not a measurement of the electricity, supervision, and depreciation individually consumed by that job.

Compare applied and actual overhead

If annual machine use is 11,500 hours, applied overhead is 92,000 dollars. If actual overhead costs total 94,500 dollars, then 2,500 dollars is underapplied: actual costs exceed allocated costs. If allocated overhead instead exceeded actual costs, overhead would be overapplied.

The difference must be reconciled under the applicable accounting treatment; it is not fixed by silently replacing the original rate with an actual-cost rate for only selected jobs. The appropriate disposition can depend on materiality and where the costs remain in inventory and cost of goods sold.